New York Attorney General Eric Schneiderman’s lawsuit filed yesterday against JPMorgan over Bear Stearns RMBS provides little indication of what investors could expect to recover if he is successful, according to three industry attorneys and a court filing.

Suing under the state’s Martin Act, Schneiderman asks in the filing for direct and indirect damages, as well as “restitution of all funds obtained from investors in connection with the fraudulent and captive acts.”

“Restitution is pretty vague,” said an industry attorney. “Here it probably means paying some money to investors that lost money, not making the bonds whole, because then only the current holders would benefit. Disgorgement is even vaguer. It means just giving back illicit profits.”

It’s difficult to know how a court would measure damages in this case, said Isaac Gradman, of Gradman Law.

If damages are calculated according to the amount Bear Stearns RMBS investors lost, it’s not clear whether investors in synthetic CDOs that referenced these RMBS would also benefit, he said. The attorney general’s press release announcing the lawsuit creates further ambiguity about who the beneficiaries of any recovery would be, by stating that one aim in filing the suit is to “bring justice for New York’s homeowners and investors,” Gradman said.

Homeowners, unlike bondholders, were not directly harmed by the alleged actions, he said, and so trying to secure damages for homeowners would create a mismatch between the harm the lawsuit aims to address and the beneficiaries of any recovery.

It’s also hard to say whether JPMorgan will be legally held responsible for activities that occurred before it owned Bear, said Annemarie McAvoy, a former federal prosecutor, former in-house counsel at Morgan Stanley and current adjunct professor at Fordham Law School. This issue — known as successor liability — has come up in related cases, such as one involving a settlement over Countrywide RMBS.

Since JPMorgan has said it was pushed by the government to acquire Bear quickly in March 2008, it may choose to fight the fairness of having to pay for soured Bear RMBS, McAvoy said. Or, JPMorgan may work with the attorney general to find a number that makes a settlement worthwhile on both sides, she said.

The complaint says Bear RMBS investors have been hit with USD 22.5bn in losses on 100 subprime and alt-A securitizations with a combined original face of USD 87bn issued in 2006 and 2007. Bear-owned EMC Mortgage securitized more than a million mortgage loans between 2003 and 2006 valued at more than USD 212bn at the time, according to the complaint.

Schneiderman’s complaint includes no federal charges or charges against any individuals, and echoes others filed by RMBS insurers and investors, according to the attorneys. There may be a political motivation behind the timing, a second industry attorney said. It’s possible that the AG filed now, as the November election approaches, so President Obama can point to a case brought by the RMBS working group, which was announced during a State of the Union Address, he said.

Criminal charges?

Gradman said there was some industry disappointment over the filing, because it could have gone further and included criminal charges to prevent issuers from merely pricing civil settlements into the cost of business.

One thing missing from this complaint, Gradman said, is the allegation included in a recent New York State civil case that Bear employees scrubbed damning data from due diligence reports before sending them to insurer MBIA.

“If there was ever conduct that looks to be ripe for a criminal investigation or charges, it would be fraud surrounding due diligence reports,” Gradman said.

However, criminal charges would be harder to bring than a civil case, McAvoy said, citing the challenges of explaining complicated RMBS transactions to a jury; pinning blame on one or a few people rather than industry-wide practices or government regulators; tracking paper trails from companies no longer in existence; and proving guilt to a higher degree of certainty than is necessary in a civil case.

If brought at all, criminal charges would more be likely against individuals, rather than banks, because the latter could destroy an entire company, McAvoy said.

AG Allegations

Much of Schneiderman’s argument deals with alleged fraud by Bear regarding due diligence reports, saying the process was “fundamentally compromised by the massive number of loans that defendants sought to have reviewed in a short period of time,” and that “Bear ignored the findings of one due diligence firm regarding defective loans up to 65% of the time in the third quarter of 2006 alone,” according to the complaint.

Also, instead of repurchasing defective loans, originators settled the matter with cash payments to Bear, which in turn refused to repurchase these defective loans from the securitization, according to the complaint.

“Bear’s misconduct appears to have been wide-ranging, which will make it difficult, if not impossible, for JPMorgan to take any of Bear’s RMBS cases to trial,” the first industry attorney said, implying that settlement would seem the more likely route.

Also, the attorney general’s subpoena power in this case could also produce incendiary documents that could help private RMBS cases, Gradman said.

As for investors, the immediate reaction was muted.

"We see no tiering between the different Bear Stearns shelves in the suit and since no single securitization has been targeted in the AG lawsuit, no specific RMBS bonds have been affected," a sellside research analyst at a primary dealer said.

Ron D’Vari, CEO of NewOak Capital, said he didn’t see much difference between this lawsuit and others already filed.

A JPMorgan spokesperson didn’t return a request seeking comment, although the bank said it would defend itself against these charges, as previously reported.